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Regulation and Compliance > Federal Regulation

Calls Grow for IRS to Address Secure 2.0 Error Threatening Catch-Up Contributions

By John Manganaro

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What You Need to Know

  • Legal experts say a drafting error in the landmark Secure 2.0 Act legislation jeopardizes the ability to make catch-up contributions to retirement accounts.
  • With a closely divided Congress that has many pressing priorities, they fear a timely legislative correction won’t be made.
  • Retirement industry groups say the IRS should issue temporary clarifying guidance to address the issue.

Stakeholders from across the U.S. retirement planning industry are calling on the Internal Revenue Service and the Treasury Department to act now to address a major technical drafting error that made its way into the sweeping Secure 2.0 Act legislation.

If uncorrected, the error would ban all tax-advantaged retirement account catch-up contributions after 2024. The problem was first reported by the American Retirement Association’s John Sullivan (formerly of ThinkAdvisor), and it involves Section 603 of the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act.

This section of the law is intended to require that catch-up contributions be directed to post-tax Roth accounts in cases where the contributor earns more than $145,000 of FICA-covered wages. But it appears that the complex process of meshing the Secure 2.0 Act’s Roth catch-up requirement with the preexisting text of the Internal Revenue Code has resulted in the inadvertent approval of statutory language that will, if not changed, entirely eliminate the opportunity for retirement savers to make catch-up contributions to either traditional or Roth-style accounts.

This outcome would represent a significant departure from the legislation’s stated intent, as among its many retirement focused-provisions, the Secure 2.0 Act significantly boosts 401(k) plan retirement account catch-up contribution limits. Specifically, the maximum limits are slated to increase from $7,500 in 2023 to $10,000 for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024.

Calls for Quick Correction

Since the ARA first illuminated the problem, multiple retirement industry organizations have taken notice and urged Congress and federal regulators to take the necessary actions, with the latest call coming from the National Association of Government Defined Contribution Administrators (NAGDCA).

On Thursday, the group sent an open letter to legal counsel at the U.S. Department of the Treasury and the Internal Revenue Service, requesting guidance declaring that the regulators are aware of the drafting error and that they will operate with the expectation of a future legislative correction.

In other words, the NAGDCA and other organizations want the Treasury and IRS to declare that they will ignore the drafting error until Congress can correct it.

“Unfortunately, it’s likely to be very difficult to get a technical corrections bill passed through Congress, despite the obvious need to fix these errors,” Brad Campbell, an attorney with Faegre Drinker and former head of the Labor Department’s Employee Benefits Security Administration, told ThinkAdvisor in January.

“The House is going to very cautious in sending any tax-related bill to the Senate, as revenue measures must originate in the House,” he said. “An opportunity to attach a corrections bill might come with the next ‘must pass’ issue, but the big picture politics associated with these debates make outcomes very uncertain. Just as passage of the [Secure 2.0 Act] came down to the wire, a corrections bill is fraught with difficulty.”

Precedent Exists for an Easy Temporary Fix

In his group’s new letter, NAGDCA Executive Director Matt Petersen submits that the Treasury and IRS should issue guidance to the public now, following the approach it used more than 15 years ago in Notice 2007-99. That piece of guidance was issued with respect to the interpretation of Internal Revenue Code section 402(1) as added by the Pension Protection Act of 2006.

In response to a similar obvious drafting error, Notice 2007-99 declared that the agency would operate “with the expectation of a future legislative correction.” This allowed stakeholders to move forward according to the legislature’s stated intent, rather than according to the requirements of demonstrably erroneous legislative text.

“This approach is reasonable, as the relevant lawmakers and their staff are aware of this technical error, but they may have difficulty finding a timely legislative vehicle to immediately advance such a correction,” Petersen writes. “Enough legislative history exists for Treasury to properly issue guidance stating that it will follow Congressional intent for the provision, rather than the erroneous final text.”

Petersen also suggests the IRS and Treasury could rely on the absurdity principle of statutory construction to arrive at the conclusion that Congress did not intend to pass legislation that is clearly ineffective.

(Image: Adobe Stock)

John Manganaro

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